Voluntary Contributions to a Mutual Insurance Pool

42 Pages Posted: 15 Dec 2015

See all articles by Louis Levy Garboua

Louis Levy Garboua

Universite de Paris I (CES) - Paris School of Economics, and CIRANO

Claude Montmarquette

Center for Interuniversity Research and Analysis on Organization (CIRANO)

Jonathan Vaksmann

Université du Maine

Marie Claire Villeval

GATE, CNRS

Date Written: September 8, 2015

Abstract

We study mutual-aid games in which individuals choose to contribute to an informal mutual insurance pool. Individual coverage is determined by the aggregate level of contributions and a sharing rule. We analyze theoretically and experimentally the (ex ante) efficiency of equal and contribution-based coverage. The equal coverage mechanism leads to a unique no-insurance equilibrium while contribution-based coverage develops multiple equilibria and improves efficiency. Experimentally, the latter treatment reduces the amount of transfers from high contributors to low contributors and generates a "dual interior equilibrium". That dual equilibrium is consistent with the co-existence of different prior norms which correspond to notable equilibria derived in the theory. This results in asymmetric outcomes with a majority of high contributors less than fully reimbursing the global losses and a significant minority of low contributors less than fully defecting. Such behavioral heterogeneity may be attributed to risk attitudes (risk tolerance vs risk aversion) which is natural in a risky context.

Keywords: Mutual insurance pool, voluntary contribution mechanism, equal coverage, contribution-based coverage, heterogeneity of risk attitudes, experiment

JEL Classification: I18, H21, H41, C72, C91

Suggested Citation

Levy Garboua, Louis and Montmarquette, Claude and Vaksmann, Jonathan and Villeval, Marie Claire, Voluntary Contributions to a Mutual Insurance Pool (September 8, 2015). Available at SSRN: https://ssrn.com/abstract=2703385 or http://dx.doi.org/10.2139/ssrn.2703385

Louis Levy Garboua

Universite de Paris I (CES) - Paris School of Economics, and CIRANO ( email )

106/112 boulevard de l'Hopital
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France
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HOME PAGE: http://team.univ-paris1.fr/teamperso/levygarb/louis.htm

Claude Montmarquette

Center for Interuniversity Research and Analysis on Organization (CIRANO) ( email )

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Montreal, Quebec H3C 3J7
Canada
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Jonathan Vaksmann

Université du Maine ( email )

Marie Claire Villeval (Contact Author)

GATE, CNRS ( email )

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Ecully, 69130
France
+33 472 86 60 79 (Phone)
+33 472 86 60 90 (Fax)

HOME PAGE: http://sites.google.com/view/marie-claire-villeval

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